PSU BANK RECAPITALIZATION IN INDIA: NOTHING FISCAL ABOUT IT

Indian stock markets were definitely not expecting a ‘Bahubali katappa Climax’ from the North Block on 25^th October. After so many annual budgetary allocations, our 38 listed commercial banks reported 34% rise in bad loans YOY in June quarter FY18. State Bank of India tops the chart for the highest NPAs for the Public Sector Undertaking (PSU) banks and ICICI Bank is there for company for Private sector. The total bad loans for banking industry have crossed Rs 8 Lakh Crore by this June 2017. Our North Block (Finance Ministry) had no other option but to recapitalize PSU Banks leaning on this double edged sword of slow credit growth and lower profitability. But ‘Unprecedented’ was the wrong word used by the media for this BOND RECAP program. It could have been, ‘Banks Are Forever’, ‘Licensed To Live’ or ‘Bond of Solace’. May be the media was so taken up by the intricracies of the bank recap or rehab program that it lost its usual satirical humor.  

PSU Bank Recapitalization - You Only Live Twice

Retail in the form of home loan, vehicle loan, credit card etc has become a panacea for private banks. This retail therapy has led to double digit growth for private bankers over the past few years. The PSU banks muddled with infrastructure and real estate loans started late and as such lost out on both interest income growth and profitability. With slowdown, loan approvals thinned and asset quality worsened. Non Performing Assets hopped out of every nook & corner of banking vicinity during the asset quality review initiated by RBI in January 2016. Basel III norms were either low or unfeasible for a number of PSU/government banks.  So this recapitalization was long due and expected by the banking sector and there is nothing Unprecedented about it. This scheme had already been applied in the 90s. Under this current Rs. 2.11 trillion package, Rs. 1.35 trillion will be in the form of recap bonds and the remaining Rs 76000 crore through budget allocation and fund raising.

Bonding PSU Convalescence

Bond, I mean the financial instrument is once again ready to rescue the world, this time the Indian banking sector. Bonds will be issued by the Indian Government and bought by the PSU Banks utilizing their large cash deposits garnered during demonetization. The Indian Government will then utilize these cash reserves to shore up equity capital of PSU Banks and fulfill Basel III norms by 2019. Does this entail to Financial Engineering as hyped by the media. In actual terms it is just hard core commonsense. It has nothing to do with the nuances of financial engineering. The government had to shore up bank equity without giving bailout packages like its western counterparts and disturbing its fiscal statement and there was no other way to make that happen. So the Indian Government turned out to be smarter than the analysts and financial pundits were left gaping and had to tutor themselves before explaining this ‘Financial Engineered Arrangement’ on their respective channels  next morning.

Short Term Panacea or New Dawn For PSU Banking Sector

Though this seems to be a short term arrangement, the government has neither disturbed its fiscal maths nor distorted market yields through borrowings. As per International Monetary Fund (IMF) rules, recapitalization bonds are below the line and only interest paid on these bonds will have to be taken into account. The Financial system remains undisturbed helping the banking sector to strengthen its balance sheet, use some capital for provisions and the remaining to reactivate their lending process.  

On 26^th October, the PSU stock Index skyrocketed with the hope of a new era where competition rules would be re-written and banking behemoths like State Bank Of India, Bank Of Baroda & Punjab National Bank hope to attain alacrity matching every step with the likes of HDFC, IndusInd or Kotak Mahindra Bank. Though the time frame for recapitalization programs is spread over two years, the clear light of daybreak is already visible.

FEDERAL BANK LTD RESEARCH REPORT - Q2 FY18

KOTAK MAHINDRA BANK LTD - Q2 FY18

Standalone

Kotak Mahindra Bank Ltd reported stable second quarter FY18 with Net Interest Income & PAT growing in double digits YOY.  Net Interest Income, difference between interest earned and expended was at Rs. 23130 Mn in the current quarter against Rs. 19950 Mn same period previous year rising 16% YOY.  Net Profit jumped 22% in Q2 FY18 and stood at Rs. 9943 Mn compared to Rs. 8133 Mn corresponding quarter previous year. Net Interest Margin declined 14 basis points YOY at 4.33% in the current September quarter. Asset quality seemed to be on a stable footing with Gross NPAs as a percentage of Gross Advances improving both yearly and sequentially by 2 & 11 basis points. Net NPAs as a percentage of Net advances jumped 6 basis points YOY at 1.26% in the current quarter against 1.20% same period previous year. On sequential basis rise was just 1 basis point. One basis point is 0.01%. Provisions & contingencies growth was 9% on yearly basis & 6% sequentially and was reported at Rs. 2165 Mn in September quarter FY18. Positive growth was witnessed in all business segments with Retail reporting 11% YOY growth, followed by 10% in treasury and 4% in corporate segment. CASA ratio stood at 48% improving 900 basis points YOY and 400 basis points on quarterly basis. CASA deposits increased from Rs. 550410 Mn in Q2 FY17 to Rs 792210 Mn in current September quarter, jump of 44% YOY. Other income or non interest revenue accounting 17% of the total income of the bank rose 15% YOY and stood at Rs. 9539 Mn in current Q2 FY18. Advances moved at a higher rate of 21% than deposits growing at a lower rate of at 17% YOY. Quarterly growth was also better for advances in the current quarter at 7% whereas deposits rose sequentially by just 1%. Kotak Mahindra Bank is part of Kotak Mahindra Group, leading financial services conglomerates with a Networth of Rs. 352060 Mn as on 30^th September 2017. The Bank with CAR of 19.40% and branch network of 1362 across the country is poised for higher growth as one of the major players in Indian banking industry. Thus we recommend BUY for the stock for medium and long term investment with a target price of Rs. 1250. 

Disclaimer                                       

                                      

The information and opinions contained in the research reports have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The research report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including but not limited to tax advice. The reports do not take into account the particular investment objectives, financial situations, risk profile or needs of individual clients. The user assumes the entire risk of any use made of this information. This report is not to be relied upon in substitution for the exercise of independent judgment.

The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Research data and reports published/ emailed/ text messaged via Short Messaging Services, Online Messengers, WhatsApp etc/transmitted through mobile application/s, including but not limited to FLIP™, Video Widget, telephony networks, print or electronic media and or those made available/uploaded on social networking sites (e.g. Facebook, Twitter, LinkedIn etc) is for informational purposes only. The reports are provided for assistance and are not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Though disseminated to clients simultaneously, not all clients may receive the reports at the same time. We will not treat recipients as clients by virtue of their receiving this report.

The reports include projections, forecasts and other predictive statements which represent our assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, circumstances and factors which involve risks, variables and uncertainties. The actual performance of the companies represented in the report may vary from those projected.

The opinions expressed in the reports are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. The reports are non-inclusive and do not consider all the information that the recipients may consider material to investments.

We shall not be in any way responsible for any indirect, special or consequential damages that may arise to any person from any inadvertent error in the information contained in the reports nor do they take guarantee or assume liability for any omissions of the information contained therein. Information contained therein cannot be the basis for any claim, demand or cause of action. These data, reports and information do not constitute scientific publication and do not carry any evidentiary value whatsoever.

The user should consult their own advisors to determine the merits and risks of investment and also read the Risk Disclosure Documents for Capital Markets and Derivative Segments as prescribed by Securities and Exchange Board of India before investing in the Indian Markets. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Prospective investors and others are cautioned that any forward-looking statements, if any, are not predictions and may be subject to change without notice.

This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material we take no responsibility whatsoever for the contents therein. Such addresses or hyperlinks are provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report shall be at your own risk.

The author of this Research Report accepts no liability and will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

FEDERAL BANK LTD - Q2 FY18

FEDERAL BANK LTD reported strong & steady September quarter with PAT rebounding in double digits after de-growth in the previous June quarter. PAT stood at Rs. 2640 Mn compared to Rs. 2010 Mn same period previous year rising 31% YOY & 25% sequentially. Net Interest Income, difference between interest earned and expended was reported at Rs. 8990 Mn in the current quarter against Rs. 7260 Mn corresponding quarter previous year, expanding 24% YOY. Net Interest Margin was reported at 3.31% improving 18 B P QOQ with a fall of 1 basis point YOY in the current September quarter. Asset quality has also improved on yearly basis as GNPA & NNPA ratios declined 39 & 29 basis points in the current September quarter.  One basis point is 0.01%.  Gross NPAs as a percentage of Gross Advances was at 2.39% in Q2 FY18 against 2.78% same period previous year. Net NPAs as a percentage of Net Advances was reported at 1.32% in the current quarter against 1.61% same period previous year. Provisions & contingencies declined 25% sequentially and wwre reported at Rs. 1768 Mn vis-à-vis Rs. 1684 Mn in Q2 FY17. Wholesale or corporate segment reported 32% growth YOY leading the pack, followed by other banking business jumping 27% YOY. Retail grew 7% YOY and 2% sequentially whereas Treasury reported 3% rise on yearly basis with sequential negative growth of 8%. CASA ratio at 32.93% jumped 189 basis points YOY in September quarter. CASA deposits increased from Rs. 267870 Mn in Q2 FY17 to Rs 320160 Mn in the current September quarter, jump of 20% YOY. Other income or non interest revenue accounting 11% of the total income of the bank rose at 5% YOY at Rs. 2872 Mn against Rs 2721 Mn same period previous year. Advances moved at a higher rate of 25% whereas Deposits grew 13% YOY. Deposits stood at Rs. 972108 Mn with sequential growth of 1.43% whereas Advances rose 6% QOQ at Rs. 806459 Mn in Q2 FY18.  Cost income ratio of bank stood at 50.83% in the current quarter against 52.40% in the corresponding quarter previous year. Federal Bank with stable Net Interest Margin, growing NII and improving asset quality is marching towards sustainable growth for long term. We recommend BUY for medium and long term investment with a target price of Rs. 185.

Disclaimer                                       

                                      

The information and opinions contained in the research reports have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The research report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including but not limited to tax advice. The reports do not take into account the particular investment objectives, financial situations, risk profile or needs of individual clients. The user assumes the entire risk of any use made of this information. This report is not to be relied upon in substitution for the exercise of independent judgment.

The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Research data and reports published/ emailed/ text messaged via Short Messaging Services, Online Messengers, WhatsApp etc/transmitted through mobile application/s, including but not limited to FLIP™, Video Widget, telephony networks, print or electronic media and or those made available/uploaded on social networking sites (e.g. Facebook, Twitter, LinkedIn etc) is for informational purposes only. The reports are provided for assistance and are not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Though disseminated to clients simultaneously, not all clients may receive the reports at the same time. We will not treat recipients as clients by virtue of their receiving this report.

The reports include projections, forecasts and other predictive statements which represent our assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, circumstances and factors which involve risks, variables and uncertainties. The actual performance of the companies represented in the report may vary from those projected.

The opinions expressed in the reports are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. The reports are non-inclusive and do not consider all the information that the recipients may consider material to investments.

We shall not be in any way responsible for any indirect, special or consequential damages that may arise to any person from any inadvertent error in the information contained in the reports nor do they take guarantee or assume liability for any omissions of the information contained therein. Information contained therein cannot be the basis for any claim, demand or cause of action. These data, reports and information do not constitute scientific publication and do not carry any evidentiary value whatsoever.

The user should consult their own advisors to determine the merits and risks of investment and also read the Risk Disclosure Documents for Capital Markets and Derivative Segments as prescribed by Securities and Exchange Board of India before investing in the Indian Markets. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Prospective investors and others are cautioned that any forward-looking statements, if any, are not predictions and may be subject to change without notice.

This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material we take no responsibility whatsoever for the contents therein. Such addresses or hyperlinks are provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report shall be at your own risk.

The author of this Research Report accepts no liability and will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Name Of Research Analyst	Financial Exposure/Interest	Ownership
Suhani Adilabadkar	Nil	Nil
Relative	Owns Shares In the Company	Less than 1%

EXIDE INDUSTRIES LTD - Q2 FY18

Exide Industries Ltd reported mixed second quarter results on 25th October 2017 hit by rising lead prices and exceptional expenditure. Revenue or Income From Operations was on a strong footing rising 9% YOY at Rs. 23713 Mn in the current quarter against Rs. 21709 Mn same period previous year. Profit After Tax declined 25% YOY at Rs. 1355 Mn against Rs. 1818 Mn corresponding quarter previous year with sequential de-growth of 28% in the current September quarter. EBDITA was reported at Rs. 3098 Mn against Rs. 3123 Mn in the same period previous year witnessing mild decline of 1% YOY. Operating Expenditure jumped 10% YOY from Rs. 18818 Mn in Q2 FY17 to Rs. 20754 Mn in the current September quarter. On quarterly basis, operating expenditure jumped just 1% in Q2 FY18. EBDITA margin fell 132 basis points YOY and was reported at 13.06% as rising lead prices took its toll. Net Profit Margin too declined impacted by higher operating cost, depreciation & finance costs in the current September quarter. Net Profit Margin was reported at 5.71% against 8.37% same period previous quarter. Other Income declined 40% YOY and was reported at Rs. 139 Mn compared to Rs. 231 Mn corresponding quarter previous year. On quarterly basis there was a rise of 5% in Q2 FY18.

Exide Industries yearly number are under pressure impacted by higher lead prices coupled with rise in depreciation which rose 18% & interest costs jumped 4 times YOY. In addition to that exception item of Rs. 418.30 Mn in the current quarter represents settlement of dispute with Exide technologies Ltd with respect to usage of the name or mark “EXIDE”. The company is seeing strong volume growth in Automotive & Motorcycles. Apart from that growth in UPS, Telecom & other infrastructure segments was also encouraging in second quarter FY18. As rising lead prices is a major concern area for the company, the company is focusing on technology up-gradation and cost control to improve its bottom-line in the coming quarters. We recommend BUY for the stock for medium & long term investment with PE multiple of 22.26 x FY18E & 20.55 x FY19E at CMP of 202.30. P/BV is seen at 3.10 x FY18E & 2.85 x FY19E with a target price of Rs. 265.

Disclaimer                                       

                                      

The information and opinions contained in the research reports have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The research report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including but not limited to tax advice. The reports do not take into account the particular investment objectives, financial situations, risk profile or needs of individual clients. The user assumes the entire risk of any use made of this information. This report is not to be relied upon in substitution for the exercise of independent judgment.

The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Research data and reports published/ emailed/ text messaged via Short Messaging Services, Online Messengers, WhatsApp etc/transmitted through mobile application/s, including but not limited to FLIP™, Video Widget, telephony networks, print or electronic media and or those made available/uploaded on social networking sites (e.g. Facebook, Twitter, LinkedIn etc) is for informational purposes only. The reports are provided for assistance and are not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Though disseminated to clients simultaneously, not all clients may receive the reports at the same time. We will not treat recipients as clients by virtue of their receiving this report.

The reports include projections, forecasts and other predictive statements which represent our assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, circumstances and factors which involve risks, variables and uncertainties. The actual performance of the companies represented in the report may vary from those projected.

The opinions expressed in the reports are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. The reports are non-inclusive and do not consider all the information that the recipients may consider material to investments.

We shall not be in any way responsible for any indirect, special or consequential damages that may arise to any person from any inadvertent error in the information contained in the reports nor do they take guarantee or assume liability for any omissions of the information contained therein. Information contained therein cannot be the basis for any claim, demand or cause of action. These data, reports and information do not constitute scientific publication and do not carry any evidentiary value whatsoever.

The user should consult their own advisors to determine the merits and risks of investment and also read the Risk Disclosure Documents for Capital Markets and Derivative Segments as prescribed by Securities and Exchange Board of India before investing in the Indian Markets. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Prospective investors and others are cautioned that any forward-looking statements, if any, are not predictions and may be subject to change without notice.

This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material we take no responsibility whatsoever for the contents therein. Such addresses or hyperlinks are provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report shall be at your own risk.

The author of this Research Report accepts no liability and will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

                                            HDFC BANK LTD - Q2 FY18

Banking Bell-weather HDFC Bank Ltd reported strong  second quarter FY18 with both PAT, NII, other income, deposits and advances all growing in double digits. PAT or Net Profit for the quarter stood at Rs. 41510 Mn compared to Rs. 34553 Mn same period previous year, rising 20% YOY & with quarterly growth of 7%, strongest over the previous two quarters.  Net Interest Income, difference between interest earned and expended was at Rs. 97521 Mn in the current quarter against Rs. 79936 Mn corresponding quarter previous year rising 22% YOY & 4% sequentially. Net Interest Margin indicating core profitability of bank’s operations stood at 4.30% for the current September quarter. Gross NPAs as a percentage of Gross Advances edged up 24 basis points YOY at 1.26%, Net NPAs as a percentage of Net advances also rose 13 basis points at 0.43% in the current Q2 FY18.  One basis point is 0.01%. On sequential basis, GNPA ratio jumped 2 basis points whereas Net NPA ratio declined one basis point. Provisions & contingencies have doubled YOY and stood at Rs. 14762 Mn with sequential decline of 5%. Double digit growth was visible in wholesale and other banking business segment at 27% & 31% respectively YOY. Retail contributing 50% of revenues followed at 9% whereas by Treasury reported 4% growth YOY. CASA ratio galloped 300 BP and stood at 43% in the current quarter. Other income or non interest revenue accounting 15% of the total income of the bank rose 24% YOY and stood at Rs. 36059 Mn in current Q2 FY18 with a sequential jump of 3%. Advances outpaced deposits moving at 22% yearly where as Deposits grew 17%.  Advances & Deposits stood at Rs. 6048669 Mn and Rs. 6893459 Mn in the Q2 FY18. Cost income ratio of bank stood at 42.60% in the current September FY18 against 45.90% corresponding quarter previous year. HDFC Bank, second largest private sector with market cap of Rs. 4720064 Mn, is an epitome of stability & profitability in the midst of global volatility and domestic uncertainty. With stable asset quality & CASA, rising NII & NIM, growing profitability and CAR of 15.10% (Tier I-13.30%), HDFC bank is one of the most desirable long term bets for retail investors.  Thus we recommend BUY for the stock for medium and long term investment with a target price of Rs. 2225.

Disclaimer                                       

                                      

The information and opinions contained in the research reports have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. The research report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including but not limited to tax advice. The reports do not take into account the particular investment objectives, financial situations, risk profile or needs of individual clients. The user assumes the entire risk of any use made of this information. This report is not to be relied upon in substitution for the exercise of independent judgment.

The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.

Research data and reports published/ emailed/ text messaged via Short Messaging Services, Online Messengers, WhatsApp etc/transmitted through mobile application/s, including but not limited to FLIP™, Video Widget, telephony networks, print or electronic media and or those made available/uploaded on social networking sites (e.g. Facebook, Twitter, LinkedIn etc) is for informational purposes only. The reports are provided for assistance and are not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Though disseminated to clients simultaneously, not all clients may receive the reports at the same time. We will not treat recipients as clients by virtue of their receiving this report.

The reports include projections, forecasts and other predictive statements which represent our assumptions and expectations in the light of currently available information. These projections and forecasts are based on industry trends, circumstances and factors which involve risks, variables and uncertainties. The actual performance of the companies represented in the report may vary from those projected.

The opinions expressed in the reports are subject to change but we have no obligation to tell our clients when our opinions or recommendations change. The reports are non-inclusive and do not consider all the information that the recipients may consider material to investments.

We shall not be in any way responsible for any indirect, special or consequential damages that may arise to any person from any inadvertent error in the information contained in the reports nor do they take guarantee or assume liability for any omissions of the information contained therein. Information contained therein cannot be the basis for any claim, demand or cause of action. These data, reports and information do not constitute scientific publication and do not carry any evidentiary value whatsoever.

The user should consult their own advisors to determine the merits and risks of investment and also read the Risk Disclosure Documents for Capital Markets and Derivative Segments as prescribed by Securities and Exchange Board of India before investing in the Indian Markets. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis. Prospective investors and others are cautioned that any forward-looking statements, if any, are not predictions and may be subject to change without notice.

This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material we take no responsibility whatsoever for the contents therein. Such addresses or hyperlinks are provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report shall be at your own risk.

The author of this Research Report accepts no liability and will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non-acting on any information/material contained in the report. This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behavior of investors or recipients or provide any investment/tax advice. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

INDUSIND BANK LTD RESEARCH REPORT - Q2 FY18

DCB BANK LTD RESEARCH REPORT - Q1 FY18

The Nudging Rise of Indian Stock Markets

Stock Markets are not nervous. That is what every economist might be thinking, though they might not be able to interpret the right reasons for this passionate buying spree. Noble laureate, Richard Thaler too admitted not understanding the rising tide of stock markets.  Is it just liquidity doing the merry go round for sovereign wealth funds & Ultra High Net Worth Institutions & Individuals or a subtle application of nudge theory at least here in India?

Economies are definitely recovering, but are the bouncing stock markets in line with the recovery rate. US markets are on a high since President Trump assumed office and are relentlessly moving northwards without any tax reforms or capital expenditure plans being implemented. China too in the recovery mode has its own shadow economy to tackle and high corporate debt to GDP ratio of about 165% but  the stock markets are fine. Japanese conundrum of low growth, higher stock markets and stronger currency still stays. Though Europe seems to be in a better position, Catalonian referendum has opened the Pandora’s Box which was nailed and shut just 16 months ago.

Indian stock Markets too follow their global peers, though the inherent sentiment seems to be different. FIIs would be having a ball at Dalal Street had not been for our Domestic Institutions coming to rescue every time there is a sell off. But where were these domestic homegrown warriors all these years. Just cooling off their heels while FIIs partied hard and our middle class was busy dumping their hard earned money in every kind of government savings scheme from PPF to NSC to KVP and of course the Post Office deposits. And then came the NUDGE, of course the government had to do it as Banks were unable to lower lending rates while deposits rates remained elevated with higher small savings rate. Reduced savings rate closer to the market, disrupted years of disciplined savings framework of our ever growing Indian Middle Class which was blessing for our stock markets and boon for the Mutual Fund industry. So this was nothing but “A subtle policy shift that encourages people to make decisions that are in their broad self-interest and well being”as per the Nudge theory by Mr Richard Thaler. So while the rest of the world is hailing it, we are already done with its implementation. Stock markets may be irrational, India Middle Class is not. 

A VIGILANT RBI HOLDS ITS RATES

Thanks to the formation of Monetary Policy Committee, Mr Urjit Patel does not have the loneliest job in India as remarked by our former RBI governor and ex Prime Minister; but there is definitely a lonely group of five. Now that the world stimulus party is getting over and commodity cycle is getting reversed or stabilized, Indian economy is bound to get impacted by its side effects as it had benefitted through the easy money policy era. The Foreign Portfolio Investors had seen it coming with the OPEC resolute on stabilizing crude and India being one of the largest oil importers, would have to pay the price for the world moving back to growth. Rising Imports by US & China, Europe witnessing its highest manufacturing PMI over the past six years, economic expansion in Brazil & Russia in the last 2-3 quarters, Middle East patiently moving towards its well chartered plan and even South Africa is out of recession. So does it mean that India has a negative co-relation with the rest of the world? Though inflation parameters might fit in such jovial scheme of things, global growth prospects are enormously interconnected.

CPI in India averaged 11% or more in 2013. So we can appreciate the effort put in by RBI in getting us down to 3.36% by August 2017. Just a few basis points away from 4%, has made RBI extremely cautious in a rising crude  and slowing growth scenario that it has extinguished for itself the safety range of 2% (+/-) around the inflation target.  RBI true to its spirit did not budge in its fourth bimonthly policy and as a result Repo Rate was held at 6%, Reverse Repo at 5.75%, Marginal Standing Facility & Bank Rate at 6.25% with a neutral stance. The central bank has cautioned against fiscal stimulus and revised real GVA growth for FY17-18 to 6.7% from 7.3%.

Stock markets still unperturbed are betting on the double digit growth in September for commercial vehicles extinguishing fears of GST, PMI Manufacturing sustained at 51.20 and improving core sector growth. So should the RBI be blamed for being over cautious and not giving growth the required fillip at this sensitive juncture. We should not forget that the Indian economy functions in an uncertain geo-political maze where self centered economic & political policies create economic upheavals & financial instruments are the new means of mass destruction. In this backdrop, Indian economy reeling under NPA mess, leveraged corporate and excess unutilized capacity in manufacturing, cannot afford even a minor mishap. So what we have is actually what we need, A Vigilant Central Bank, for an emerging Indian economy.

Legendary investor George Soros had once said, “I see tremendous imbalance in the world. A very uneven playing field, which has gotten tilted very badly. I consider it unstable. At the same time, I don't exactly see what is going to reverse it”.

VOLTAS LTD - RESEARCH REPORT Q1 FY18